Summers' Fed Exit Fails To Spur Precious Metals As "Fundamentals Return"

September 16, 2013

The PRICE of gold fell hard Monday morning, retreating near Friday's 5-week lows after earlier spiking to $1336 per ounce in Asian hours despite wholesale dealers reporting lacklustre trade.

Former US Treasury secretary Larry Summers last night withdrew from being considered for the role of US Federal Reserve chief, citing strong political opposition.

That leaves current vice-chair and noted advocate of low interest rates Janet Yellen the likely successor to Ben Bernanke next February.

World stock markets rose Monday, while the US Dollar dropped half-a-cent to the Euro and sank to fresh 8-month lows vs. the Pound.

That drove gold for UK investors down to £822.75 per ounce – the lowest level since 7 July, and more than 7% beneath Monday morning last week.

"We had thought," says Standard Bank's chief FX strategist Steven Barrow, "that political risks surrounding Syria and the Fed chair nomination shifted the balance of probability towards bond tapering in December, not September.

"But now that these risks have been lifted it seems most likely that the Fed will taper this week."

"Given the damage done last week to the gold price," says a note from analysts at US investment bank Morgan Stanley, "only a complete delay in tapering would likely bring gold back to its late August peak."

New data released Friday showed speculative traders in US gold futures and options slashing their net bullish position last week at the fastest pace since June's gold price crash.

Shrinking by 14% from a week before, the "net long" position of non-industry players' bullish minus bearish bets as a group dropped to 381 tonnes by last Tuesday.

Now the smallest "net spec long" since mid-August, last week's position was still almost 3 times greater than early July's 14-year low.

"Investors appear to be exiting long positions in anticipation of a possible fall in precious metals prices around [this Wednesday's] Fed meeting," says Jonathan Butler at Japanese trading and investment company Mitsubishi Corporation.

But "at the same time, there appears to be only limited new short position taking, suggesting investors remain unconvinced of the potential for significant downside from here."

Looking at Friday's late rally in gold, commodity analysts at Commerzbank in Frankfurt reckon "[it] is likely to have been triggered initially by money managers who closed short positions just before the weekend."

But "the change in US monetary policy," says German precious metals refining group Heraeus in its Weekly Update, "is likely to continue weighing...in the coming year."

Silver prices also fell Monday morning, dropping to $21.74 per ounce and nearing Friday's 1-month lows.

"Despite [silver's] low price level" last week, says refiner Heraeus, "industrial consumers reacted cautiously.

"On the contrary, when silver temporarily recovered, we observed an increase in sales of scrap metal."

Base metals held steady on Monday morning, but broad commodity indices dropped 0.8% as crude oil fell hard to new 4-week lows.

"I see Syria fading as a factor that's moving oil markets," Bloomberg quotes head of consulting Robin Mills at Manaar Energy Consulting & Project Management in Dubai. "It become evident there was no attack imminent."

Longer-term analysis by Societe Generale's natural resources team today says that "Commodities should trade mainly on their respective fundamentals," pointing to what they call "a regime change" in what's driving prices.

"The ongoing normalisation of the global financial system after the 2008 meltdown," write SocGen's team, means that "the proportion of price variability explained by [supply and demand] has approached – or even surpassed – the proportion explained prior to Lehman."

"The temporary sparkle that we had seen because of Syria is disappearing," says $3bn asset manager Donald Selkin at National Securities Corp. in New York.

"The market is trying to find a price for gold in an environment where the Fed begins cutting back its assistance."

 

Adrian Ash

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash is head of research at BullionVault, the physical gold and silver market for private investors online. City correspondent for Bill Bonner’s Daily Reckoning from 2003 to 2008, and previously head of editorial at London's top publisher of private-investment advice, Adrian is now a regular contributor to many leading analysis sites including Forbes and Gold-Eagle, and a regular guest on the BBC as well as international broadcasters. His views on the gold market are frequently quoted by the Financial Times, Daily Telegraph, MarketWatch and many other leading new outlets.

 

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